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What’s Up in Washington? (MAG Quarterly- Volume Five, Issue Three)

By Barrie VanBrackle, Partner, Orrick

September 7, 2017

Though the dog days of summer drag on, the cases affecting the financial services industry continue to wind their way through the courts. The CFPB and other regulators are also getting in on the action, issuing regulations that will affect how consumer financial disputes will be resolved in the future.

Eleven states have filed a petition with the Supreme Court requesting review of the 2nd Circuit’s decision permitting Amex to use anti-steering provisions in merchant contracts. Initially, the DOJ and 17 states sued Visa and MasterCard for similar provisions. However, Visa and MasterCard, entered into consent decrees with the DOJ, agreeing to remove or revise the provisions at issue. The DOJ has declined to appeal the case to the Supreme Court. Nonetheless, many state attorneys general have advanced the cause and several amici have weighed in, encouraging the Court to take up the case.

According to a press release issued by the DOJ when the case was filed in 2010, “[b]y preventing merchants from rewarding consumers when they use less expensive credit cards to make a purchase [card companies] have inhibited merchants’ ability to reduce card acceptance costs, and therefore their retail prices to consumers.” The states argue that such practices effectively restrict competition by eliminating swipe fee price competition between credit card issuers. Over the past decade, various retailers and regulatory agencies have pursued cases against the payment card brands, alleging violations of various laws including violation of antitrust law with respect to interchange fee practices. Note the continuum of cases, US and foreign litigation and regulatory enforcement actions, against Visa and MasterCard since 2006 below in Appendix A.

Because Amex still prohibits merchants from steering customers to cards with lower swipe fees, the settlement agreements between the US, Visa, and MasterCard have little practical effect. Merchants cannot realistically forego Amex transactions for the sake of incentivizing sales using a lower-fee card brand. The Court returns from its summer recess the last week of September, and will begin hearing cases the first week of October.

CFPB Prohibits Mandatory Arbitration Clauses

In July, the CFPB issued its Final Arbitration Rule (the “Rule” or “Final Rule”), prohibiting financial companies from inserting arbitration provisions with mandatory class action waivers into consumer contracts. According to the Bureau, mandatory arbitration provisions discourage individuals from pursuing claims against financial institutions, as the cost and time of proceeding individually in arbitration proceedings typically outweigh the value of the claims at issue. Unless action is taken, the final rule will become effective 60 days after the Rule was published in the Federal Register (July 19) and will apply to arbitration agreements entered into or modified 241 days after publication. However, the Rule is in danger of Congressional challenge. If Congress uses its Congressional Review Act powers to send a resolution to the President (both houses of Congress must submit a resolution to the President with 60 days of July 19, 2017) and the President signs the resolution, the regulator proposing the rule is barred from creating a “substantially similar” regulation unless specifically authorized by Congress to create one.

D.C. District Court Permits Payday Lender Case to Proceed

A D.C. District Court recently denied a motion seeking dismissal and summary judgement in a case alleging violations of the Administrative Procedure Act and due process stemming from the federal government’s Operation Choke Point. (Advance Am. v. FDIC, 14-cv-00953 (D.D.C. July 5, 2017)). Though the court decided to dismiss one plaintiff—PH Financial Services—from the suit, the claims by Advance America, Check Into Cash, and NPC Finance will proceed.

According to Plaintiffs in the case; the FDIC, the Federal Reserve, and the OCC coerced banks to end business relationships with payday lenders in an effort to put such companies out of business. Begun in 2013, Operation Choke Point was designed to eliminate fraudulent companies’ access to the banking industry. Plaintiffs allege that the “regulatory agencies, with active support from the Department of Justice (“DOJ”), are engaged in a concerted campaign to drive them out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.” Plaintiffs claim that the government has threatened financial institutions with “harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures.” The district court has expressed doubt as to the likelihood that plaintiffs’ claims will succeed on the merits. However, the plaintiffs have cleared an important procedural hurdle, and the case will proceed to discovery.